UAE. The Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, possessing 40% of proven world oil reserves, have spare oil production capacity now of 2.5 to 3 million barrels per day and are positioned to meet any possible shortfall in supplies to world markets as a result of possible declines in Iranian exports as a result of sanctions, said the Institute of International Finance (IIF).

The IIF is the leading global association of financial services firms with more than 450 member institutions. It expects that average oil prices will be about US$114 per barrel through 2012 with GCC oil production this year at 17.3 million barrels per day, after 16.5 million in 2011.

The IIF forecasts that the GCC’s external current account surplus is likely to rise to a new record of US$358 billion this year, up from an estimated US$327 billion in 2011.

The Institute stated that a further increase in the stock of net GCC foreign assets is in prospect to take the total to about US$1.9 trillion by the end of this year, equivalent to 127% of projected GDP, and then rising to around US$2.1 trillion by the end of 2013. It noted that about 60% of the foreign assets of the region are managed by sovereign wealth funds.

Dr. George T. Abed, IIF Senior Counselor and IIF Director for Africa and the Middle East, thanked the DIFC for hosting a press conference today on the release of the IIF’s GCC report. He said, “The prospects for the GCC are impressive, yet there are clearly risks. At a most general level, there is the issue of the impact on the GCC should turbulence in other Arab countries be prolonged.”

He emphasized, “Other risks from the sanctions on Iran indicate ambiguous outcomes. On the one hand, a large drop in Iran’s oil exports, but in the absence of a military confrontation, suggests an upside risk, since it would require significantly higher oil output from the GCC countries, raising the growth rate and lifting hydrocarbon receipts and government spending. However, an escalation of the crisis into a military conflict with Iran, even without necessarily the involvement of the GCC countries themselves, could bring about untold damage to the economies of the region, as such a conflict could easily spread.”

Dr. Garbis Iradian, IIF Deputy Director, Africa and Middle East Department, stated, “We are forecasting some moderation in overall 2012 growth for the GCC at 4.9% after the exceptional rise of 6.9% last year. The average masks significant variations in prospects for individual countries. Qatar, Oman and Saudi Arabia will continue to be the strongest performers. Saudi Arabia is expected to see growth of about 5.0% driven by the continued sizable increase in crude oil production and the lag effect of the sharp increase in public spending (26%) of last year. The modest inflationary pressures in Saudi Arabia will persist, as they reflect local housing bottlenecks and stronger domestic demand.”

Dr. Iradian added, “In the UAE, we expect overall growth to moderate to 3.2% in 2012 from an estimated 4.7% in 2011. Average crude oil production in Abu Dhabi is expected to increase by 3.5% in 2012, compared with an increase of 9% in 2011. Continued higher oil prices and fiscal surpluses have encouraged Abu Dhabi’s Executive Council to press ahead with several of its large projects this year.

"This may more then offset a possible weakening of private sector investment and result in nonhydrocarbon growth of 3.1% in 2012. In contrast, we expect Dubai’s real growth to decelerate from 3.2% in 2011 to 2.6% in 2012 as a result of the weaker global prospects and the sanctions on Iran, which would adversely impact trade activity. Dubai is more vulnerable to global economic developments than Saudi Arabia, Qatar, Kuwait, and Abu Dhabi due to its high debt, its diversified economy, and its strong links to global trade. However, Dubai’s excellent infrastructure and its prime location as a global hub for trade and tourism should continue to underpin diversification and robust growth over the medium term."

With regard to financial institutions, the IIF report stressed that GCC banks remain well capitalized and profitable. The balance sheets of banks in the region have been strengthened as a result of the strong economic performance in recent years, high government participation in banks (ranging between 13% in Kuwait and 52% in the UAE), and improvement in regulation and supervision.

The average capital adequacy ratio is above 15% for every banking system in the region, although variations among individual banks are at times significant. While nonperforming loan (NPL) ratios are in the low single digits, they remain relatively high in Kuwait and the UAE at close to 8%.

The ratios of banks’ provisions to potential losses associated with NPLs are high in Saudi Arabia, Oman and Qatar, but are below 60% in Bahrain and Kuwait.

Placing oil and gas developments in the region in perspective, Dr. Abed noted, “Economic activity in the heavily oil-based economies of the six countries continues to be driven by buoyant government spending, financed by surging oil and gas revenues and setting the pace for private sector activity. As a measure of the public sector’s contribution to aggregate demand, the non-hydrocarbon government deficit averaged 27% of GDP and 60% of non-hydrocarbon GDP in 2011.”

Dr. Abed added, “Government spending since 2002 has grown at an average annual nominal rate of 14.5%, driving up the breakeven (Brent) price of oil that would balance these countries’ budgets. The breakeven prices have risen from around US$30 per barrel in 2003 to US$80 per barrel for Saudi Arabia and about US$90 per barrel for the UAE in 2011. While for the principal oil producers in the region breakeven prices remain comfortably below prevailing market levels, the unrelenting rise in and the near irreversibility of government spending could expose the fiscal position to undue risk because of the historically high volatility of oil and gas prices.”